ACCT 2230 Lecture Notes - Lecture 2: Income Statement, Opportunity Cost, Marginal Cost

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12 Aug 2016

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Advertising and sales commission are period costs, direct labour and indirect labour are product costs. Within the relevant range, variable costs remain constant on a per unit basis and vary in total, but fixed costs remain constant in total and vary on a per unit basis. Examples of variable costs: shipping costs, sales commissions, direct materials. Examples of fixed costs: cost of purchasing a truck, plant and machinery. Marginal cost: the cost incurred to produce one more unit of a product. Opportunity cost: what is given up by selecting one alternative over another. Product cost: direct material, direct labour and indirect labour. Product costs flow through the inventory accounts until the goods are sold, at which time they become an expense in the cost of goods sold section on the income statement. Cost objects include: anything for which cost data is desired, customers, organizational units. The schedule of cost of goods manufactured contains 3 elements of product costs.

Related Questions

Consider the following information and answer the questionbelow.

		Selling	Direct Labour	Advertising	Machinery
	Sales	price	cost	cost	costs
Product X	12,000 units	$5 per unit	$3 per unit	$400	$5000
Product Y	16,000 units	$4 per unit	$3.50 per unit	$200	$6200

Which of the following is true? Product X:

Select one:

a. contributes more to profit than Product Y.

b. has higher variable costs than Product Y.

c. produces lower profits than Product Y.

d. has higher fixed costs that Product Y.

Looking to achieve the highest grade possible, please see below. Please indicate if this answer is correct. IF I have left a calcuation out, please include.

Thank you,

The Big Bus Company manufactures two products, Product 1 and Product 2. Product 2 was developed as an attempt to enter a market closely related to that of Product 1. Product 2 is the more complex of the two products, requiring three hours of direct labour time per unit to manufacture compared to one and one-half hours of direct labour time for Product 1. Product 2 is produced on an automated production line. Overhead is currently assigned to the products on the basis of direct labour-hours. The company estimated it would incur a total of $396,000 in manufacturing overhead costs and produce 5,500 units of Product 2 and 22,000 units of Product 1 during the current year. Unit costs for materials and direct labour are:

			Product 1	Product 2
	Direct Labour		$7	$15
	Direct material		$9	$20


Required:

a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year. (5 marks)

			Product 1	Product 2	Total		Allocation
Direct Labour hour / unit			1.5	3			396,000 / 49,500
units produced			22,000	5,500			8
total labour hour			33,000	16,500	49,500
overhead/unit			12	24			overhead/unit is calculated by direct LH x 8

		Product 1	Product 2
Direct material		9	20
Direct labour		7	15
overhead/unit		16	35
cost/unit		32	70





b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: (5 marks)


					Expected Activity
		Activity Costs Pools		Estimated Overhead Costs	Product 1	Product 2	Total
		Machine set-ups required		$170,000	700	1,000	1,700
		Purchase orders issued		37,000	300	200	500
		Machine-hours required		91,000	4,000	9,000	13,000
		Maintenance requests issued		98,000	400	600	1,000
				$396,000


	Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

			Total Cost	Product A	Product B
	Machine Setups		170,000	70,000	100,000
	purchase order		37,000	22,200	14,800
	machine hours		91,000	28,000	63,000
	maintenance requests		98,000	39,200	58,800
	Total		396,000	159,400	236,600
				22,000	5,500
	overhead /cost			7..25	43..02

			product 1	product 2
	Direct Labour		9	20
	direct material		7	15
	overhead / unit		7..25	43.02.
	Unit/ cost		23..25	78.020.

Hall Company manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for two levels of production.

Match the definitions to the terms.

- Remain constant in total, but vary on a per-unit basis.

- Contain both a fixed element and a variable element.

- Vary both in total and on a per-unit basis.

- Vary in total but remain constant on a per-unit basis.

Classify each cost above as either variable, fixed, or mixed.

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ACCT 2230 Lecture Notes - Lecture 2: Income Statement, Opportunity Cost, Marginal Cost

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